Rumored merger between Yara International and CF Industries could shake up potash market

Norwegian fertilizer producer Yara International announced, this week, that it has entered talks with US-based CF Industries (an ammonia and nitrogen production giant) for a possible merger. Should the two companies reach a deal, it would be a merger of equals, giving birth to an industrial giant with a market value exceeding USD$ 27 billion.

The talks are at a very early stage and their outcome is still uncertain but the Oslo Stock Exchange reacted favorably to the possible merger as Yara’s shares (Oslo: YAR) rose by almost 9% on Tuesday. The compatibility between CF and Yara is not immediately apparent; however, the two giants have complementary markets. Yara is a truly global company with interests from nitrogen (world’s no.1 producer) to potash and phosphate based fertilizers. CF (NYSE: CF) is the world’s no.2 ​​ammonia producer and also has phosphate interests but it is largely focused on the North American market. The two merger candidates are very familiar with each other quite apart from their ranking as the largest and second largest nitrate fertilizer producers. In 2010 they fought a bidding war over US-based Terra Industries. That war ended with Yara throwing the towel as CF purchased and fully absorbed Terra for over USD$ 4.1 billion. CF Industries also has access to cheap natural gas, which is very important in the production of nitrogen fertilizers.

It may be too early to speculate about ‘synergies between the two giants, other than their complementary market geography; nevertheless, there is no doubt the resulting fertilizer giant would have unprecedented distribution and product portfolio. Such will be its power that the combined Company could face regulatory scrutiny in many markets. Certainly, Yara’s rationale is to gain a stronger foothold in the North American fertilizer markets. For its part, CF Industries, headquartered in Chicago, has a market value of $ 12.7 billion and has its main production focus in the US Midwest, Canada, UK and Trinidad & Tobago. A CF/Yara merger would result in a Company with the market and production power to challenge Potash Corp of Saskatchewan, whose value is estimated at USD$ 28.9 billion. The merger, therefore, would cause a major shakeup of the fertilizer industry.

Yara, which is some 30% Norwegian government owned, would get production areas in the United States, where operating costs are low. CF Industries would, in turn, get access to Yara’s presence in over 150 countries. The risk for PotashCorp and its partners in the CANPOTEX pricing mechanism (Mosaic, Agrium, PotashCorp) is that the new giant would cause a major disruption with its production power. More competition could lower prices in the medium to long term, and lead to layoffs while farmers would enjoy inevitably lower fertilizer prices. In some ways, the union of Yara and PotashCorp would achieve something akin to the combined company that would have risen from BHP Billiton’s hostile takeover bid for PotashCorp in 2010 (blocked by the Canadian government).

The timing of the Yara/CF merger talks (said to be in their early stage) come as nitrogen fertilizer prices have stabilized at yearly high levels. Despite the downward trend in grain markets, basic nitrogen-specific markets remain bullish. Thus, the supply of ammonia remains complicated for fertilizer producers, which points to higher production costs. Many urea production facilities have closed, which has kept the international price high. In this context, the ammonium nitrate producers will benefit at the expense of the more potash concentrated producers. Global potash prices, while stabilized compared to last year, have tended to stagnate in the context whereby the evolution of the former Uralkali and Belaruskali cartel remains under discussion. As for phosphate, while international prices and markets are relatively stable, they are subject to the weakness of the euro against the rising US Dollar, increasing the import price, potentially lowering demand.